Financial Markets as Nonlinear Adaptive Evolutionary Systems
AbstractThis paper gives an overview of joint work with Buz Brock, on evolutionary adaptive belief systems (ABS) for modelling financial markets. Recent work with Andrea Gaunersdorfer is also reviewed and some recent experimental work on expectation formation in financial markets is also discussed. Financial markets are viewed as evolutionary systems between different, competing trading strategies. Agents are boundedly rational in the sense that they tend to follow strategies that have performed well, according to realized profits or accumulated wealth, in the recent past. Simple technical trading rules may survive evolutionary competition in a heterogeneous world where prices and beliefs co-evolve over time. The evolutionary model explains stylized facts of real markets, such as fat tails and volatility clustering. Although the ABS is very simple, it is able to match the autocorrelation patterns of returns, squared returns and absolute returns of 40 years of S&P 500 data.
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Bibliographic InfoPaper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 00-03.
Date of creation: 2000
Date of revision:
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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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Other versions of this item:
- C. H. Hommes, 2001. "Financial markets as nonlinear adaptive evolutionary systems," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 149-167.
- Cars H. Hommes, 2001. "Financial Markets as Nonlinear Adaptive Evolutionary Systems," Tinbergen Institute Discussion Papers 01-014/1, Tinbergen Institute.
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4988, National Bureau of Economic Research, Inc.
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